“The Really Good People Want Autonomy”

BethuneGordonContinentalAirlinesFormerCEO2011-03-09.jpg

“Gordon M. Bethune, chief executive of Continental Airlines from 1994 to 2004, says that “being good at your job is predicated pretty much on how the people working for you feel.”” Source of caption and photo: online version of the NYT article quoted and cited below.

Gordon Bethune is usually given credit for introducing marginal cost pricing to the airline industry, and thereby bringing Continental Airlines back from bankruptcy.
His views on how to hire and manage employees are worth serious consideration:

(p. 2) Q. How do you hire people?

A. The really good people want autonomy — you let me do it, and I’ll do it. So I told the people I recruited: “You come in here and you’ve got to keep me informed, but you’re the guy, and you’ll make these decisions. It won’t be me second-guessing you. But everybody’s going to win together. We’re part of a team, but you’re going to run your part.” That’s all they want. They want a chance to do it.

For the full interview Adam Bryant conducted with Gordon Bethune, see:
Gordon M. Bethune. “Corner Office; Remember to Share the Stage.” The New York Times, SundayBusiness Section (Sun., January 3, 2010): 2.
(Note: the online version of the article is dated January 2, 2010.)

Roy E. Disney as a “Real-life Jiminy Cricket”

DisneyRoyE2011-03-08.jpg“Roy E. Disney, shown in 1996, was considered a tough and outspoken critic of top executives at the Walt Disney Company.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B18) LOS ANGELES — Roy E. Disney, who helped revitalize the famed animation division of the company founded by his uncle, Walt Disney, and who at times publicly feuded with top Disney executives, died on Wednesday in Newport Beach, Calif. He was 79.

His death, at Hoag Memorial Hospital Presbyterian, was caused by stomach cancer, a spokeswoman for the Walt Disney Company said. Mr. Disney, who had homes in Newport Beach and the Toluca Lake district of Los Angeles, was the last member of the Disney family to work at the entertainment conglomerate built by his uncle and his father, Roy O. Disney.
As a boy the younger Roy would play in the halls of his uncle’s studio, where animators often used him as a test audience as they toiled on movies like “Pinocchio.” As an adult he helped bring the animation studio back from the brink, overseeing a creative renaissance that led to “The Little Mermaid,” “Beauty and the Beast” and “The Lion King.”
But the soft-spoken Mr. Disney was primarily known for a willingness to question the company’s top managers, aggressively and publicly, when he felt they were mishandling the family empire. Some people in the company referred to him as its real-life Jiminy Cricket: a living conscience who was at times intensely disliked by management for speaking out.
. . .
Returning to the company in 1984, Mr. Disney set about revitalizing the floundering animation division. He obtained financing, for instance, for a computerized postproduction facility, helping to make possible the revolving ballroom scene in “Beauty and the Beast.”

For the full obituary, see:
BROOKS BARNES. “Roy E. Disney Dies at 79; Rejuvenated Animation.” The New York Times (Thurs., December 17, 2009): B18.
(Note: ellipsis added.)

“It Isn’t the Consumers’ Job to Know What They Want”

iPadChild2011-01-21.jpg “Steven P. Jobs has played a significant role in a string of successful products at Apple, including the iPad, shown above, which was introduced last year.” Source of caption and photo: online version of the NYT article quoted and cited below.

(p. B1) Shortly before the iPad tablet went on sale last year, Steven P. Jobs showed off Apple’s latest creation to a small group of journalists. One asked what consumer and market research Apple had done to guide the development of the new product.

“None,” Mr. Jobs replied. “It isn’t the consumers’ job to know what they want.”
For years, and across a career, knowing what consumers want has been the self-appointed task of Mr. Jobs, Apple’s charismatic co-founder. Though he has not always been right, his string of successes at Apple is uncanny. His biggest user-pleasing hits include the Macintosh, the iMac, iBook, iPod, iPhone and iPad.
But as he takes a medical leave of absence, announced on Monday, the question is: Without him at the helm, can Apple continue its streak of innovation, particularly in an industry where rapid-fire product cycles can make today’s leader tomorrow’s laggard?
. . .
(p. B4) With the iPad tablet, Apple jump-started a product category. But with the iPod (a music and media player) and iPhone (smartphone), Apple moved into markets with many millions of users using rival products, but he gave consumers a much improved experience.
“These are seeing-around-the-corner innovations,” said John Kao, an innovation consultant to corporations and governments. “Steve Jobs is totally tuned into what consumers want. But these are not the kind of breakthroughs that market research, where you are asking people’s opinions, really help you make.”
Regis McKenna, a Silicon Valley investor and marketing consultant, said employees at Apple stores provide the company with a powerful window into user habits and needs, even if it is not conventional market research.
“Steve visits the Apple store in Palo Alto frequently,” said Mr. McKenna, a former consultant to Apple.
. . .
In a conversation years ago, Mr. Jobs said he was disturbed when he heard young entrepreneurs in Silicon Valley use the term “exit strategy” — a quick, lucrative sale of a start-up. It was a small ambition, Mr. Jobs said, instead of trying to build companies that last for decades, if not a century or more.
That was a sentiment, Mr. Jobs said, that he shared with his sometime luncheon companion, Andrew S. Grove, then the chief executive of Intel.
“There are builders and traders,” Mr. Grove said on Tuesday. “Steve Jobs is a builder.”

For the full story, see:

STEVE LOHR. “The Missing Tastemaker?” The New York Times (Weds., JANUARY 19, 2011): B1 & B4.

(Note: ellipses added.)
(Note: the online version of the article is dated January 18, 2011 and has the title “Can Apple Find More Hits Without Its Tastemaker?.”)

Those Who Paid Attention to Risk, Did Better in Crisis

DownsideRiskCROcentralityGraph2010-1.jpgSource of graph: screen capture from p. 43 of NBER paper referenced below.

At the American Economic Association meetings in Denver from January 6-9, I attended several sessions dealing the causes and cures of the economic crisis of the last few years.
One issue that came up more than once was whether, and to what extent, various decision makers were blameworthy in what happened. Was this a crisis that well-trained, hard-working and prudent managers, regulators and legislators should have seen coming? Or was it a once in 100 year storm that nobody should be expected to have foreseen?
One compelling bit of evidence was presented in a talk on January 8th by Charles Calomiris in which he presented a graph from a 2010 NBER paper by Ellul and Yerramilli. The graph, shown above, indicates that firms that took risk seriously, as proxied by their giving an important pre-crisis role to a Chief Risk Officer (CRO), tended to suffer less downside volatility during the crisis.

Source:

Ellul, Andrew, and Vijay Yerramilli. “Stronger Risk Controls, Lower Risk: Evidence from U.S. Bank Holding Companies.” NBER Working Paper # 16178, July 2010.

Entrepreneurial Improvisation is Like “Jumping Rock to Rock Up a Stream”

HoppingCreekStones2010-10-04.jpg“Crossing the Sulphurous River.” Source of caption and photo: http://www.flickr.com/photos/33506763@N00/211985842#/photos/sparlingo/211985842/lightbox/

In The Venturesome Economy book, and later (pp. 129 and 142) in the book quoted below, Bhidé describes the entrepreneur’s decision process as “improvisation.”

(p. 18) Entrepreneurs who start uncertain businesses with limited funds have little reason to devote much effort to prior planning and research. They cannot afford to spend much time or money on the research; the modest likely profit doesn’t merit much; and the high uncertainty of the business limits its value.

Sketchy planning and high uncertainty require entrepreneurs to adapt to many unanticipated problems and opportunities. One entrepreneur likens the process of starting a new business to jumping from rock to rock up a stream rather than constructing the Golden Gate Bridge from a detailed blueprint. Often, to borrow a term from Elster’s discussion of biological evolution, entrepreneurs adapt to unexpected circumstances in an “opportunistic” fashion: Their response derives from a spur-of-the- moment calculation made to maximize immediate cash flow. Capital-constrained entrepreneurs cannot afford to sacrifice short-term cash for long-term profits. They have to play rapid-fire pinball rather than a strategic game of chess.

Source:
Bhidé, Amar. The Origin and Evolution of New Businesses. Oxford and New York: Oxford University Press, 2000.
[Note to self: the search phrase “jumping rock stream” seems most productive of relevant images]

Chris_and_Andrea_Jumping_from_Rock_to_Rock_Up_a_Stream.JPG“Chris and Andrea Jumping from Rock to Rock Up a Stream.” Source of caption and photo: http://picasaweb.google.com/lh/photo/Q-FvMT8GFG7kZdvUm8d_Jw

JumpingRiverRocks2010-10-04cropped.jpg

“Girl (10-12) jumping on rocks in river.” Source of caption and photo: http://cache4.asset-cache.net/xc/200447463-001.jpg?v=1&c=NewsMaker&k=2&d=B3B7071D257FC0393BFC8E309AE4811E35B7CE0CF91BE8709437A3EAE6A5D3E800123AA3B5A18ED0

Forecasting Errors Increase in Complex Environments

(p. 54) There is a great deal of evidence that suggests that when people– for example, investors and managers–are taken out of a familiar environment–an environment of continuity–their ability to deal with the future deteriorates rapidly. John Sterman, J. Spencer Standish professor of management and director of the System Dynamics Group of MIT, who has studied the ability of managers to learn over long periods of time, says that in complex environments, the more experience people have the more poorly they perform. Here is a distillation of Sterman’s findings:

• “Even in perfectly functioning markets, modest levels of complexity cause large and systematic deviations from rational behavior.”
• “There is little evidence of adaptation of one’s ‘rules’ as the complexity of the task increases.” When the environment is complex, people seem to revert to simple rules that ignore time delays and feedback, leading to lowered performance.
• Individuals “forecast by averaging past values and extrapolating past trends. [They] actually spend less time making their decisions in the complex markets than in the simple ones.”
• The lowered performance people exhibit as a result of greater com-(p. 55)plexity does not improve with experience. People become “less responsive to critical variables and more vulnerable to forecasting errors–their learning hurts their ability to perform well in the complex conditions.”
• Most individuals do not learn how to improve their performance in complex conditions. In relatively simple conditions–without time delays or feedback–people “dramatically outperform the ‘do nothing’ rule, but in complex situations many people are bested by the ‘do nothing’ rule.” Attempts individuals make to control the system are counterproductive.

Markets that are undergoing rapid or discontinuous change are extremely complex. Economic systems are highly networked and involve substantial feedback. Given Professor Sterman’s findings, it is not surprising that forecasting deteriorates in the face of rapid change.

Source:
Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market—and How to Successfully Transform Them. New York: Currency Books, 2001.

Creative Destruction Book Is Useful for Documenting Dynamism of U.S. Firms

CreativeDestructionBK.jpg

Source of book image: http://www.innovation-creative.com/IMAGES/Livres_innovation_2/Foster_&_Kaplan/Foster_&_Kaplan-(US).jpg

The first couple of chapters of Creative Destruction are useful at providing some statistics on the degree of dynamism in U.S. companies over the past century or so.
In the rest of the book the authors present some interesting examples and refer to some useful research, but too often fall into the too-quick and too-easy management fad-advice mode—and Christensen and Raynor make a sound point in claiming that Foster and Kaplan sometimes oversell their main point.
Still there is some thought-provoking material here and there. I will be quoting a couple of the neater insights in the next couple of weeks.

Book discussed:
Foster, Richard N., and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market—and How to Successfully Transform Them. New York: Currency Books, 2001.

CFOs Are Bad at Forecasting, and Don’t Realize They Are Bad

(p. 5) . . . , three financial economists — Itzhak Ben-David of Ohio State University and John R. Graham and Campbell R. Harvey of Duke — found that chief financial officers of major American corporations are not very good at forecasting the future. The authors’ investigation used a quarterly survey of C.F.O.’s that Duke has been running since 2001. Among other things, the C.F.O.’s were asked about their expectations for the return of the Standard & Poor’s 500-stock index for the next year — both their best guess and their 80 percent confidence limit. This means that in the example above, there would be a 10 percent chance that the return would be higher than the upper bound, and a 10 percent chance that it would be less than the lower one.

It turns out that C.F.O.’s, as a group, display terrible calibration. The actual market return over the next year fell between their 80 percent confidence limits only a third of the time, so these executives weren’t particularly good at forecasting the stock market. In fact, their predictions were negatively correlated with actual returns. For example, in the survey conducted on Feb. 26, 2009, the C.F.O.’s made their most pessimistic predictions, expecting a market return of just 2.0 percent, with a lower bound of minus 10.2 percent. In fact, the market soared 42.6 percent over the next year.
It may be neither troubling nor surprising that C.F.O.’s can’t accurately predict the stock market’s path. If they could, they’d be running hedge funds and making billions. What is troubling, though, is that as a group, many of these executives apparently don’t realize that they lack forecasting ability. And, just as important, they don’t seem to be aware of how volatile the market can be, even in “normal” times.

For the full commentary, see:
RICHARD H. THALER: “Economic View; Often Wrong, But Never in Doubt.” The New York Times, SundayBusiness Section (Sun., August 22, 2010): 5.
(Note: ellipses added.)
(Note: the online version of the article is dated August 21, 2010 and has the somewhat shorter title “Economic View; The Overconfidence Problem in Forecasting.”)

The Ben-David et al article is:
Ben-David, Itzhak, John R. Graham, and Campbell Harvey. “Managerial Miscalibration.” Fisher College of Business Working Paper No.2010-03-012, July 2010.

Christensen’s Innovator’s Dilemma Is “Most Influential Business Book”

(p. W3) . . . in today’s world, gale-like market forces–rapid globalization, accelerating innovation, relentless competition–have intensified what economist Joseph Schumpeter called the forces of “creative destruction.”
. . .
When I asked members of The Wall Street Journal’s CEO Council, a group of chief executives who meet each year to deliberate on issues of public interest, to name the most influential business book they had read, many cited Clayton Christensen’s “The Innovator’s Dilemma.” That book documents how market-leading companies have missed game-changing transformations in industry after industry–computers (mainframes to PCs), telephony (landline to mobile), photography (film to digital), stock markets (floor to online)–not because of “bad” management, but because they followed the dictates of “good” management. They listened closely to their customers. They carefully studied market trends. They allocated capital to the innovations that promised the largest returns. And in the process, they missed disruptive innovations that opened up new customers and markets for lower-margin, blockbuster products.

For the full commentary, see:
ALAN MURRAY. “The End of Management; Corporate bureaucracy is becoming obsolete. Why managers should act like venture capitalists.” The Wall Street Journal (Sat., AUGUST 21, 2010): A17.
(Note: ellipses added.)

The most complete and current account of Christensen’s views can be found in:
Christensen, Clayton M., and Michael E. Raynor. The Innovator’s Solution: Creating and Sustaining Successful Growth. Boston, MA: Harvard Business School Press, 2003.

Charles II Took a Gamble on Toleration

GamblingManBK2010-09-01.jpg

Source of book image: online version of the WSJ review quoted and cited below.

(p. A19) Early in “A Gambling Man,” a detailed and thoroughly engrossing examination of the Restoration’s first decade, Jenny Uglow notes that Charles Stuart, upon his ascension, “wanted passionately to be seen as the healer of his people’s woes and the glory of his nation.” Cromwell’s regime had featured constant war and constant taxes. The population was bitterly divided among Anglicans, Catholics and dissenting Protestants–Presbyterians, Puritans, Quakers, Baptists. A huge standing army had burdened the people financially and frightened them; such an army, it was not unreasonably thought, could be used to impose a tyranny.
. . .
As a result of such divisions, Charles became a “gambler,” as Ms. Uglow puts it–not at cards or gaming tables but at affairs of state. His biggest gamble was on something he fervently wanted to achieve: religious toleration for all sects and the freedom for Englishmen to follow their own “tender consciences” in individual worship. He forwarded this policy in Parliament only to receive his first major defeat with the passage of the Corporation Act, a law that took the power of corporations (governing towns and businesses) away from Nonconformists and handed it back to the Church of England. Charles had gambled on “the force of reasonable argument,” Ms. Uglow says, but was ultimately defeated “by the entrenched interests of the [Anglican] Church” and “the deep-held suspicions” of Parliament, which believed that England’s dissenting sects posed a persistent threat. That Charles was willing to go head-to-head with Parliament for such a cause, even in failure, was especially audacious, considering his father’s fate.
. . .
In his desire to be a monarch of the people, Charles was determined to make himself accessible–in the early days of his reign he threw open the palace of Whitehall to all comers. He gambled, with some success, that (in Ms. Uglow’s words) “easy access would make people of all views feel they might reach him, preventing conspiracies.” During the 1666 Great Fire of London he and his brother, James, duke of York, went out into the streets and put themselves alongside soldiers and workmen. They could be seen “filthy, smoke-blackened and tired,” frantically creating a firebreak as the blaze consumed London like a monstrous beast.

For the full review, see:
NED CRABB. “BOOKSHELF; Risky Business; A bitterly divided nation, a monarchy splendiferously restored..” The Wall Street Journal (Fri., NOVEMBER 27, 2009): A19.
(Note: ellipses added; bracketed word in original.)
(Note: the online version of the review is dated NOVEMBER 26, 2009.)

Book being reviewed:
Uglow, Jenny. A Gambling Man: Charles II’s Restoration Game. New York: Farrar, Straus and Giroux, 2009.

Inventors Should Work Alone, Even If They Have to Moonlight

(p. 291) If you’re that rare engineer who’s an inventor and also an artist, I’m going to give you some advice that might be hard to take. That advice is: Work alone.

When you’re working for a large, structured company, there’s much less leeway to turn clever ideas into revolutionary new products or product features by yourself. Money is, unfortunately, a god in our society, and those who finance your efforts are businesspeople with lots of experience at organizing contracts that define who owns what and what you can do on your own.
But you probably have little business experience, know-how, or acumen, and it’ll be hard to protect your work or deal with all that corporate nonsense. I mean, those who provide the funding and tools and environment are often perceived as taking the credit for inventions. If you’re a young inventor who wants to change the world, a corporate environment is the wrong place for you.
(p. 292) You’re going to be best able to design revolutionary products and features if you’re working on your own. Not on a committee. Not on a team. That means you’re probably going to have to do what I did. Do your projects as moonlighting, with limited money and limited resources. But man, it’ll be worth it in the end. It’ll be worth it if this is really, truly what you want to do–invent things. If you want to invent things that can change the world, and not just work at a corporation working on other people’s inventions, you’re going to have to work on your own projects.
When you’re working as your own boss, making decisions about what you’re going to build and how you’re going to go about it, making trade-offs as to features and qualities, it becomes a part of you. Like a child you love and want to support. You have huge motivation to create the best possible inventions–and you care about them with a passion you could never feel about an invention someone else ordered you to come up with.
And if you don’t enjoy working on stuff for yourself–with your own money and your own resources, after work if you have to– then you definitely shouldn’t be doing it!

. . .

It’s so easy to doubt yourself, and it’s especially easy to doubt yourself when what you’re working on is at odds with everyone else in the world who thinks they know the right way to do things. Sometimes you can’t prove whether you’re right or wrong. Only time can tell that. But if you believe in your own power to objectively reason, that’s a key to happiness. And a key to confidence. Another key I found to happiness was to realize that I didn’t have to disagree with someone and let it get all intense. If you believe in your own power to reason, you can just relax. You don’t have to feel the pressure to set out and convince anyone. So don’t sweat it! You have to trust your own designs, your own intuition, and your own understanding of what your invention needs to be.

Source:
Wozniak, Steve, and Gina Smith. iWoz: Computer Geek to Cult Icon: How I Invented the Personal Computer, Co-Founded Apple, and Had Fun Doing It. New York: W. W. Norton & Co., 2006.
(Note: Italics and centered ellipsis in original.)